A good friend and I are creating a real estate partnership to purchase buy and hold rental properties over an extended period of time. While we both have our own capital, we decided that we could buy more properties faster if we partner together. Here are my questions to the forum:
- Based on my above description, should we even create a partnership?
- If so, what are the best practices as far as how to legally create a partnership?
- When it comes to purchasing properties through the partnership, what is the best practice?
- Can anyone refer me to any resources that would be helpful for this?
Thanks!
Should you? As opposed to what?
I generally advise people NOT to go into business with friends or family. The emotional issues prevent you from making hard business decisions, things always go bad and it screws up Christmas for everyone. You end up losing either the business or the friend/family, or both. I’ve never seen one go well. I’ve seen it happen too many times to count. I currently have a client that is no longer speaking to Uncle Mike. No Operating Agreement. Uncle Mike decided he didn’t want to work that hard. Thing is, I warned them in Nov 2016 to not do this deal together. But I digress…
However, if you go this route, PUT IT IN WRITING. Have a partnership agreement. Who will put in what. When will each person put in more. Who will get out what and when. Who is going out to the property at 2 am in the snow when the police call? Who is doing the work? How will that person be compensated for that work? Or will you do all the work while your partner does nothing and then still split everything 50/50. What’s the sell trigger? What’s plan B? Plan C? What happens when a partner gets sick and can’t work? Or loses a job and can’t contribute to the mortgage payment this month? Or dies. Or gets a divorce. Right of first refusal? Now you are in business with a hostile ex-spouse who owns 25%? Or his daughter is getting married and he needs to take out $30k in cash for the wedding. PUT IT IN WRITING. SIGN IT. NOTARIZE IT.
Most title companies can work with a partnership purchase, but expect to have to give a personal guarantee. This guarantee is “joint and several,” so if one partner has more assets, be sure this is covered in your WRITTEN partnership agreement for your protection.
Your best resource is going to be your attorney. Seriously. The WRITTEN AND SIGNED partnership agreement is the only thing that may save you.
and Christmas.
I always try to push people away from partnerships. Here is the thing, why not do it yourself? Some people think, well, I need a money partner. Well, if you get a good enough deal, you can find the money, trust me. you have to be creative in finding that money, you may have to pay high points, high interest but once you get into a partnership, you sacrifice so much more.